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JPMorgan Faces Probe over Hiring in China - Analyst Blog

JPMorgan Chase & Co
. (
JPM
) is facing an inquiry by the Federal authorities over alleged
inconsistencies in its hiring practices in Hong Kong. The bank
has been accused of employing the children of influential Chinese
officials in order to gain profitable business deals in the
thriving nation.

JPMorgan has been requested by the US Securities and Exchange
Commission to disclose information regarding the bank's
employment of some former employees in Hong Kong and its business
relationships with certain clients.

It has been reported that JPMorgan hired the son of a former
banking regulator who is currently the chairman of the China
Everbright Group, a state-controlled financial conglomerate. This
helped JPMorgan seal various vital assignments from the Chinese
conglomerate that consisted of providing advice to a subsidiary
of the company on stock offering.

Moreover, JPMorgan hired the daughter of a former Chinese railway
official of The China Railway Group, a state-controlled
construction company. The bank provided counsel to the company
over its plans to convert into a public entity. Further, in 2007
China Railway Group raised over $5 billion with JPMorgan's
assistance.

In the past, many Wall Street and European financial institutions
with operations in China have hired children of Chinese officials
in an attempt to capitalize on the promising growth opportunities
in the Chinese economy. The
Goldman Sachs Group, Inc
. (
GS
) had once hired the former Chinese president Jiang Zemin for its
private investment arm.

Moreover, in 2012, a former
Morgan Stanley
(
MS
) adviser was imprisoned after he was accused of bribing a
Chinese official to win profitable real estate investments for
the bank.

In recent years, the hiring of children of prominent Chinese
leaders has become increasingly difficult due to the growth of
the domestic private equity industry. These domestic industries
provide profitable opportunities to Chinese investors with
powerful family backgrounds.

The probe is a matter of concern for both JPMorgan and
influential Chinese officials since the hiring of the children of
renowned bureaucrats is a common practice among financial
institutions. Moreover, it provides a path for the banks to
secure its new businesses in China. The scrutiny is expected to
bring up more names of the children of several Chinese officials.

Moreover, the probe is expected to heighten JPMorgan's legal
woes. The bank is already encountering a series of regulatory
investigations pertaining to the sale of risky MBS preceding the
financial crisis as well as the $6 billion trading loss it
incurred in the London whale derivatives scandal. All these
factors are expected to add to JPMorgan's anticipated legal
expenses in the near term.

JPMorgan currently carries a Zacks Rank #3 (Hold). In the same
industry,
BankUnited, Inc
. (
BKU
) is performing well and carries a Zacks Rank #1 (Strong
Buy).

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